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China amends reserve regulation to boost credit buffers
By Hu Xiaocen |
April 23, 2012, Monday
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CHINA has amended its reserve regulation to push Chinese banks to further shore up credit buffers, which will benefit the country's banking sector over the long term, Standard & Poor's Ratings Services said today.
The Ministry of Finance recently revised the general banking risk reserve norm, according to which financial institutions will have to distribute more profits into the general banking risk reserve under shareholders' equity. The reserve will in principle be at least 1.5 percent of risky assets, up from the current 1 percent. The new rule will take effect on July 1, said the ministry.
"The revised regulation indicates the government's entrenched concern about a possible deterioration in Chinese banks' asset quality during an economic slowdown in China," said S&P's credit analyst Ryan Tsang. "Loan loss provision norms in China are already stringent. We believe this rule would further enhance Chinese banks' credit buffers."
The agency said the revised regulation will have a minor impact on most major Chinese lenders given their profitability and cautious dividend policy. "For these banks, we believe the new rule could just alter the mix of profit distribution between retained profits and general banking risk reserves, with minimal impact on dividend payouts."
But the agency also said the new rule only relates to risky assets on lenders' balance sheets and leaves out the off-balance sheet exposure. This shortcoming is particularly relevant given that the aggregate off-balance-sheet credit commitments of the top eight Chinese banks grew 40.5 percent from 2009 to 2011 to 11.5 trillion yuan (US$1.8 trillion), representing 34.9 percent of the total gross loans on their balance sheets.
The Ministry of Finance recently revised the general banking risk reserve norm, according to which financial institutions will have to distribute more profits into the general banking risk reserve under shareholders' equity. The reserve will in principle be at least 1.5 percent of risky assets, up from the current 1 percent. The new rule will take effect on July 1, said the ministry.
"The revised regulation indicates the government's entrenched concern about a possible deterioration in Chinese banks' asset quality during an economic slowdown in China," said S&P's credit analyst Ryan Tsang. "Loan loss provision norms in China are already stringent. We believe this rule would further enhance Chinese banks' credit buffers."
The agency said the revised regulation will have a minor impact on most major Chinese lenders given their profitability and cautious dividend policy. "For these banks, we believe the new rule could just alter the mix of profit distribution between retained profits and general banking risk reserves, with minimal impact on dividend payouts."
But the agency also said the new rule only relates to risky assets on lenders' balance sheets and leaves out the off-balance sheet exposure. This shortcoming is particularly relevant given that the aggregate off-balance-sheet credit commitments of the top eight Chinese banks grew 40.5 percent from 2009 to 2011 to 11.5 trillion yuan (US$1.8 trillion), representing 34.9 percent of the total gross loans on their balance sheets.
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